Collateral eligibility of bonds issued or guaranteed by the Greek government

Due to the expiration on 25 July 2012 of the buy-back scheme for marketable debt instruments issued or fully guaranteed by the Hellenic Republic, these instruments will become for the time being ineligible for use as collateral in Eurosystem monetary policy operations.

In line with established procedures, the Governing Council of the European Central Bank (ECB) will assess their potential eligibility following the conclusion of the currently ongoing review, by the European Commission in liaison with the ECB and the IMF, of the progress made by Greece under the second adjustment programme.

Liquidity needs may be addressed by the relevant national central bank in line with existing Eurosystem arrangements.

Remember when the ELA was a "temporary, stop-gap" measure? Neither do we. So while Greek bonds are no longer cash good collateral (who would have thunk it: a broke country's bonds are not good collateral), Greece is still eligible for ELA. There is however a catch. Back in May we quantified the ELA dry powder still remaining for Greece, and the fact that at this point there is virtually no additional capacity left. The ECB is aware of this. With this move, is the ECB beginning to set the stage for the Greek exit?

We already posted a full run down from JPM on what the immediate costs from a Greek EMU exit would be (starting at €400 billion and going higher), but one point that bears repeating is just how much borrowing capacity Greece has under the ELA in the aftermath of today's news that the ECB is leaving Greek banks to fend for themselves until such time as the Greek recapitalization payment is wired over to Greece, which the ECB has defined simply as "soon." The answer: woefully inadequate, and certainly not enough to backstop the remaining Greek deposits of €170 billion as of the end of March (likely far less now), at €65 billion. And that's an upside estimate: as JPM says "The true maximum amount that Greek banks can borrow via ELA is likely though to be significantly smaller because not all loans are accepted as collateral via ELA." Remember: this is all just one giant game of chicken - Greece's Syriza has bet the farm that the cost from a Greek fallout is just too big to Europe and the terms of the hated "Memorandum" will be adjusted, while to Europe, on the other hand, the outcome to Greece, at least according to Europe and the IIF's Dallara will be "between catastrophic and armageddon." So... Who blinks first?

From JPM:

Greek banks have run out of ECB eligible collateral already and can only access Bank of Greece’s ELA, but even with ELA, the collateral,typically loans, is not unlimited. They have already borrowed €60bn via ELA which, assuming 50% haircut corresponds to around €120bn of loan collateral. Outstanding loans are €250bn, so Greek banks have a maximum of €130bn of remaining loan collateral which allows for a maximum of €65bn of additional borrowing from Bank of Greece’s ELA. This corresponds to around 40% of Greek bank deposits which stood at €170bn as of the end of March. The true maximum amount that Greek banks can borrow via ELA is likely though to be significantly smaller because not all loans are accepted as collateral via ELA. The alternative is for Greek banks to be allowed to issue more government guaranteed paper but the ECB can, with a 2/3rd majority, block a steep and unsustainable increase in Bank of Greece’s ELA. This would effectively cut Bank of Greece off from TARGET2.

Once TARGET2 starts unwinding, with a massive €644 billion claim on the Eurosystem by the Bundesbank, and the realization that an imploding heretofore "contingent" and suddenly all too real liability amounting to 25% of German GDP means an in-kind collapse in living standards, then the simmering German anger will go truly parabolic.